If you are an individual looking for ways to reduce your tax liability and perhaps you have utilised your pension annual allowance for the year, then the government-backed ‘Seed Enterprise Investment Scheme’ (SEIS) could offer an exciting opportunity with generous tax reliefs.
SEIS was created to boost economic growth in the UK and seeks to promote new enterprises. In return for investing capital in qualifying start-up companies, individuals are offered some of the most attractive tax reliefs available in the UK - up to 50% relief on income tax.
Based on its parent scheme, the Enterprise Investment Scheme (EIS), SEIS is designed for investment in even smaller companies and provides greater tax benefits compared with EIS.
Investments of up to £100,000 can be made per annum, across a number of SEIS companies in exchange for qualifying shares, up to a 30% stake in each company. To be eligible to enjoy the majority of the tax benefits outlined below, the shares will need to be held for at least three years. The tax benefits are:
- up to 50% income tax relief on the amount invested (regardless of your rate of tax) provided you have paid enough tax to offset your SEIS investment against. For example, if you invest £10,000 in SEIS you will receive £5,000 income tax relief to offset against your tax liability. The income tax claim can be made in the year of the investment or ‘carried back’ to the previous year;
- gains arising on the disposals of SEIS shares after three years are 100% exempt from capital gains tax, saving up to 20% tax;
- SEIS also benefits from a relief known as re-investment relief, where investors who are due to pay capital gains tax on a disposal of other assets, can exempt 50% of that gain (up to a maximum annual limit of £50,000) if the sale proceeds are reinvested in qualifying SEIS shares. It is therefore possible to receive a further 20% tax saving; and
- if the shares are held for two years or more there is a 100% exemption from Inheritance Tax.
To cushion against the risk of the start-up company failing, security is provided by allowing tax relief on a loss arising on the sale of the shares (after deducting the amount received as income tax relief) to be offset against tax paid on other income in the same year, at the highest income tax rate. For example, in the event the company is unsuccessful and you lose your entire investment of £10,000, due to the combination of tax reliefs, the overall cost to you would be £3,000 (as a higher rate tax payer) or even lower at around £2,000 if re-investment relief had been claimed.
Government statistics at April 2016 show that since the HMRC approved scheme was launched in 2012/13, 4,660 qualifying companies have received investment from individuals through SEIS totalling £424 million.
Overall these schemes are favourable in terms of the tax benefits and should be considered together with overall investment strategy.